The 4th industrial revolution & geopolitics

04/10/2018

A short inquiry into the nature and causes of fairness amongst nations.

The internet is ablaze with stories about new technologies; some delight with wondrous new possibilities of zero emission cities, remote controlled smart homes, bionic prosthetics and financial solutions for the unbanked; others offer spine-chilling reads of humans losing livelihoods to robots, untraceable 3D printed guns, cryptocurrency scams and devastation due to climate change. Which path the world heads down depends to a large extent on the decisions made by policymakers and concern is that protectionism and populism more broadly speaking may be gaining the upper hand. A positive outcome is ultimately about fairness amongst nations and individual people, but securing such an outcome promises a high-stakes race against time.

The speed of change is accelerating, but time is not easily compressed

Roughly 120 years separated the first industrial revolution, that began in the 1760s and brought steam powered engine and mechanized production, from the second industrial revolution, that began in the 1880s and brought mass production powered by electricity and fast-track expansion of telegraph and railroad networks. Fast forward 90 years to the 1970s and we arrive at the digital revolution, that allowed automation of production, optimised supply chains globally and delivered the Internet.

Less than 50 years on, we are already entering the fourth industrial revolution, with artificial intelligence, the internet of things, 3D printing, advances in bio- and nanotechnologies all linking in with exponential gains in computing power. A notable feature of this history is how the balance between innovators, capital and labour has change over time. Schematically put, the firstindustrial revolution relied on a few innovators to develop the technology, vast amounts of capitalto build it and a supply of low-skilled labour to put it to use. Over time, this balance has shifted with more innovators, less concentrated capital needs and increased demand for high-skilled labour.

Economists, including this author, keenly prescribe education and life-long learning as optimal solutions for workers whose jobs are threatened by new technologies. And while some income redistribution to address inequality can be warranted, education is a far more effective means to secure equal opportunities. Education, however, takes time and demands resources, but also drives much prized technological progress.

Technology has intensified the completion amongst nations for jobs

It is no wonder that countries are competing for high skilled people. The brain drain that is alreadyadversely impacting several developing countries today, moreover, is likely to intensify unless theeconomic, social and political conditions in those countries improve dramatically. This poses a major conundrum for developing and advanced economies alike. For developing economies, a strategy of attracting jobs from abroad seems a clever response, and low-cost communication and transportation has made this a viable solution. Back in 1980, China ranked as the 10th largest economy in the world; today it’s the 2nd largest.

China owes much of its economic success to an economic programme that successfully attractedin millions of jobs from abroad. In principle, this should be a win-win situation, allowing workers in the country that jobs are being outsourced from to move up the value chain and benefit from increased purchasing power as the cost of goods and services outsourced becomes cheaper. Education holds the key to this mechanism. There is indeed a certain irony to the fact that the protectionist measures advocated by certain populist leaders could ultimately further increase pressure from migration. Although, to be fair, some may already have understood this with the idea of building ever higher border walls.

The global supply chain of services has already bolted

This is not to advocate that trade should be left to its own devices; quite the contrary. Organisationssuch as the World Trade Organisation (WTO) and the G20 have a major role to play ensuring a level playing field for frictionless trade respecting patents, consumer rights and securing health and safety. With new technologies making services ever more mobile and seeing swaths of data flowing around the world, the WTO needs a major upgrade. The third industrial revolution allowed manufacturing supply chains to become global. In principle, regulation and punitive tariffs could potentially force part of the supply chain of goods back within national borders.

This solution would be suboptimal to say the least and previously outsourced jobs may just return only to be done by robots. Moreover, consider the efforts it would take to bring digital capabilities under the control of national borders without a serious infraction of democratic rights. The fourth industrial revolution will further challenge geographical borders and the global supply chain of services has probably already bolted.

Finance requires efficient and global coordinated regulation

Finance is an area that deserves particular attention and not least given how new technologies are reshaping the very core of this sector. Take cryptocurrencies as an example; unregulated these assets could become a hotbed for fraud and financing of criminal and terrorist activities. At the same time, put to good use, the formidable technologies that underpin cryptocurrencies hold tremendous possibilities.

The ability of regulators to define frameworks that protect savers and secures sufficient financingfor economic growth is key and in a world where controlling capital flows is becoming more challenging, such responses need to be coordinated. It’s worth recalling that the G20 not only played a major role following the financial crisis of 2007/08 in co-ordinating the broader policy response but was also instrumental in defining a new global regulatory framework. Inequality also links in with the question of finance. While education is critical to equal opportunities, access to finance is critical for equal opportunity to implement ideas. Policymakers should also focus on this goal in defining the regulation that will shape the financial sector of the future.

The energy time-bomb is ticking

Exploiting the new technologies may require less concentrated capital but still demands vast sums of investments to be made, and not least when it comes the energy needed to power the fourth industrial revolution. The International Energy Agency forecast global energy consumption toincrease by over 20% by 2040 and taming carbon emissions requires investment in renewables and more energy efficient technologies. Climate change further threatens geopolitical stability as millions of people become displaced by drought and flooding.

Controlling the natural resources of production is an age-old driver of geopolitics. For the countriescontrolling these resources major gains can be extracted but failure to use these to sufficient diversify the economies in question also brings major risk. New technologies have the power to shift the balances between commodity producers and raises potentially very significant geopolitical challenges. One could also question whether data should be considered in the debate on resources. It is certainly a precious resource and one that requires thought as to how is exploited. And once again, coordination of data policies and regulation are key.

A closing thought for Adam Smith

While contemplating the fourth industrial revolution offers the imagination a journey into the future of time, the simple answer is that policymakers should ensure the appropriate framework for trade and markets to function fairly and effectively can trace its roots back to one of the great economic thinkers of the first industrial revolution, namely Adam Smith.

Looking back in time also offers very stark warnings of what failure to ensure the right policy response could entail. The multi-lateral order of global governance established after WWII established the UN, NATO and the WTO; and, while a rethink is in order, there can be little doubt as to the importance of these institutions today. Time is of the essence, however, as new technologies simply will not wait.